Africa Finance Forum Blog

Sub-Saharan Africa (SSA) has continuously exhibited the lowest savings rate in the developing world. The average gross domestic savings rate1 in SSA was 16% of GDP in 2008 compared to 22% in Latin America and Caribbean and 35% in South East Asia. Although the picture varies significantly across economies with some countries displaying modest domestic savings rates [e.g. Guinea (3%), Burundi (4%), Mozambique and Ghana (7%)] to relatively robust savings rates [e.g. Lesotho (22%), Rwanda (27%) and Mali (28%)]2, the reality is that we need to increase savings rates in Africa to levels consistent with sustainable economic development, which are considered to be above 25% of GDP.Why have most African countries failed to achieve high savings rates?

The causes of this problem are extensively documented in the economic literature. Savings has long been repressed by controlled low interest rates and high inflation in various countries. Negative real interest rates have really discouraged people from monetizing their savings using formal financial institutions; rather; they favor savings in tangible assets (e.g. livestock, stockpiles, etc.). While we thought these were stories from the past, people have seen their savings completely vanish with hyperinflation as recently occured in Zimbabwe. Nevertheless, we should recognize that financial liberalization measures have helped address the problem in most countries.

However, what has not evolved very much is the scanty regard policy makers in Africa have paid to savings mobilization. And the strong reliance on foreign aid to finance development needs has certainly played a role in this attitude. Initially, aid was supposed to complement domestic financial resources in order to boost development efforts and help countries break away from poverty; instead it has ended up dampening domestic savings and creating dependence in Africa. Despite the pervasive interpretation of the “vicious cycle theory”, no country is indeed too poor to save. Research in microfinance has brought to our attention the variety of savings practices by poor people. These small deposits provided social safety nets to the bottom end of the pyramid during the food and fuel crisis in 2008 since microfinance institutions and savings banks in many African countries experienced serious declines in their deposit balances.

How then to harness this potential and create a dynamic for savings mobilization?

Increasing awareness from policy makers

Greater awareness from policy makers that a low domestic savings rate is a bottleneck to economic growth is essential. Kenya Vision 2030 recognized the need to raise the domestic savings rate above 30% as vital to ensure long-term double digits economic growth. In South Africa, a Savings Institute has been established to promote thrift values and reverse the downward trend, which has seen the domestic savings rate fall from 26% in the 80s to 16% in 2008. In the same vein, the C103 underscores the need to mobilize untapped savings as part of the African countries' efforts to increase domestic resource mobilization4.

Deepening financial sectors

This implies a wide array of transformational changes that positively affect savings rates. Efforts to reduce barriers (e.g. physical distance to banking outlets, high minimum balances, financial illiteracy, disproportionate KYC5 requirements, etc.) certainly deepen financial access. At the institution level, the emergence of non-bank financial intermediaries such as insurance companies and pension firms is instrumental to the development of contractual savings while MFIs and savings banks are vital in canvassing small savings. At the product level, it is important to leverage remittance flows and e-money stores in cellphones for the purpose of increasing savings. Upgrading regulatory and supervisory frameworks shall also instill and preserve confidence in the financial system, which is favorable to savings. Some countries have plans to introduce deposit guarantee schemes, which are often viewed as genuine mechanisms for protecting depositors. Finally, financial market infrastructure should be improved to facilitate financial intermediation.Would demand-side drive supply-side policy reforms?

Sir John Hicks (Nobel in Economics, 1972) argued that the real challenge is to create the link between potential savings and effective investment. Unlocking the potential of savings is not an end in itself. Most important is to create the conditions for proper financial intermediation. If the environment is conducive for banks to increase lending to individuals and enterprises, they will certainly deploy aggressive strategies for mobilizing savings. Likewise, governments stimulate the mobilization of savings by resorting to domestic markets for the financing of their own needs. Allow me to skip the debate about potential “crowding out effects” on private investment and “budget deficits”. The case is made here against external debt as the alternative. It is well known that African economies are particularly vulnerable to external shocks, which can rapidly render the debt service burden in hard currencies unsustainable.

To conclude, the virtues of savings for economic development are unquestionable. Africa should try to follow the same route taken by industrialized and emerging economies.

[2] World Development Indicators (WDI) 2010, World Bank.

[3] The Committee of Ten African Ministers of Finance and Central Bank Governors (The C-10) was created in Tunis in November 2008. The members of the C-10 are the following countries and institutions: Algeria, Botswana, Cameroon, Egypt, Kenya, Nigeria, South Africa, Tanzania, the Central Bank of West African States (CBWAS), and the Central Bank of Central African States (CBCAS). At its creation the C-10 was charged among other responsibilities to identify strategic economic priorities for Africa and develop a clear strategy for Africa’s engagement with the G-20 through South Africa, the only African representative in this Group. For more information - www.afdb.org/en/topics-sectors/topics/financial-crisis/committee-of-ten/&nbsp;

[4] See Communiqué of the Meeting of the Committee of African Ministers of Finance and Governors of Central Banks (C 10), October 6, 2010, Washington, D.C, pp. 2-3 (§8).

[5] Know Your Customer (KYC).

Dr. Hugues Kamewe Tsafack is currently the Stakeholder Relationship Officer at the MFW4A Secretariat . Before joining the Secretariat, he worked for 10 years with the World Savings Banks Institute (WSBI) as Financial Sector Development Advisor in charge of the Africa region.

The views expressed in this article are those of the author and do not represent Making Finance Work for Africa.

There is a wide gap between the US and Nigeria’s level of financial development. Yet, they share many puzzling features, including regulatory trends, structural transformation and response to shocks. For instance, the banking industry in Nigeria has experienced marked changes over recent years, characterized by a decline in the number of banks, growing concentration and increasingly international focus. Like many of their American counterparts, the largest banks transformed into full-service financial firms offer diversified range of products and services to retail and corporate clients.

Growth of non-interest revenue is a noticeable trend; technology is also transforming banking business (among other things) in the decline in paper-based payments, and the emergence of very large financial service firms has continued to mirror the developmental trend of US financial services. Regulators have had to face challenges in adapting to this new domestic environment by paying attention to domestic credit market, potential shocks from securities and insurance business.

We here analyze the commonalities and the co-movement between the US and Nigerian’s financial service regulations.

Regulatory Trends: Recent events in the Nigerian financial services landscape suggest that the Nigerian financial services regulators usually mirror the domestic financial services supervisory frameworks after the American example (viz: a broad range of elements of Sarbanes–Oxley entering Nigeria’s Corporate Governance tenets, introduction of “Universal Banking” in 2000, following the repeal of the US Glass-Steagall Act in 1999, and, a decade later, the ongoing scrapping of the Universal Banking following the introduction of the “Volker Rule”, aimed at limiting the banks' trading and investment capabilities, by President Obama in January this year). Also, the extant delineation of commercial bank’s margin lending limits echoes similar restrictions in the US jurisdiction.

New Capital Requirements: They are hard-coded into regulation, with references to US$50billion-asset financial firms (investment or commercial banks) described as being “systematically important” to the US financial services industry. Similarly, the new capitalisation requirements for international, regional and merchant banking delineate the level of scrutiny that they will attract in Nigeria. For example, the systemic dangers of banks may raise differing red-flags at differing times unlike the experience of the “rescued banks” in August 2009.

Financial Stability Oversight Council: The US council is mandated to specifically scrutinise emergent risks to the whole financial system. Indeed a specific “Vice Chairman for Bank Regulation” has been established to report to the US Congress. Similar responsibility is echoed in the ongoing resuscitation of Nigeria’s Financial Services Regulation Coordinating Committee (FSRCC), promulgation of Asset Management Corporation of Nigeria (AMCON) Act, and support for CBN’s financial services reforms.

Stress Tests: Like the US Supervisory Capital Assessment Programs (sensitivity, scenario-tests to forecast capital adequacy), stress tests will soon become regular occurrences instead of dramatic one-offs. They will be more akin to stop-checks and will be an expansion of the type of special examinations of (historic) books that the Central of Nigeria (CBN) carried out in mid-2009.

“Living Wills”, as coined by Bloomberg Markets journal: Like an expanded, more elaborate (and more structured) form of Nigeria’s exercises, and as being practiced in the US, systematically important banks may find themselves subject to detailed distressed-sale measures which would reduce the risk and financial burden on trading partners in case of untoward market movements or developments.

As outlined above, and in many other respects, the Nigerian financial services regulation appears to follow similar trend with the US financial services regulation. While leveraging on other jurisdictions’ regulations is not a new phenomenon, adaptability of such regulations to local political and socio-economic realities is critical for success. This is in addition to regulators’ involvement of other stakeholders in the debate on such adaptability. Nigeria appears to have recognised this as demonstrated in the process that led to the banks’ new prudential guideline and AMCON Act.

Vincent Nwani is Head of Research at First Bank of Nigeria. The article has been co-authored with Tunji Inaolaji, Research Associate at First Bank.

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